By Bryan Jung
JPMorgan Chase CEO Jamie Dimon listed three major threats to the U.S. economy in a recent comment during the bank’s second-quarter earnings call, according to the transcript.
The banking giant’s July 14 second-quarter results showed revenue and earnings exceeding economists’ expectations, but the JPMorgan chief stands on the side of caution.
JPMorgan reported net income of $14.5 billion, up 15 percent from the first quarter, and was a 67 percent increase from the same quarter last year.
Mr. Dimon praised the strong results, noting that nearly “all of our lines of business saw continued growth in the quarter,” but added, “there are still salient risks in the immediate view.”
Dimon Warns of Three Key Threats That May Spark Recession
The JPMorgan CEO said that high core inflation, quantitative tightening, and the war in Ukraine are the three biggest threats to the American economy at this time.
“Consumers are slowly using up their cash buffers, core inflation has been stubbornly high—increasing the risk that interest rates go higher and stay higher for longer—quantitative tightening of this scale has never occurred, fiscal deficits are large, and the war in Ukraine continues, which in addition to the huge humanitarian crisis for Ukrainians, has large potential effects on geopolitics and the global economy,” said Mr. Dimon.
Regarding a recession, Mr. Dimon said that consumers would be facing the potential crisis in “rather good condition with low borrowings and, you know, good house price value still.”
He then added that “headwinds are substantial and somewhat unprecedented.”
“This war in Ukraine, oil and gas, quantitative tightening, unprecedented fiscal needs of governments … which we’ve never experienced before. And I just think people should take a deep breath in that.”
“We’re trying to be really clear here. The consumer is in good shape. They’re spending down their excess cash. That’s all tailwinds,” concluded Mr. Dimon.
Inflation and Ukraine War Causing Economic Uncertainty
The Consumer Price Index (CPI) for June rose 3 percent from a year ago, making it the smallest 12-month increase since March 2021.
However, core CPI, which excludes food and energy, increased 4.8 percent year over year.
If core inflation persists at “stubbornly high” levels, the value of American’s earnings could massively lose value because of inflation and causing hardship for millions of struggling families.
The Russia–Ukraine war has been particularly bad for global markets, especially regarding supply-chain disruptions, increased energy prices, and widespread uncertainty in the world economy.
The loss of Russian gas and oil exports has played a partial role in the volatility of the energy markets over the past year, and has particularly caused pain for the residents of the European Union.
Some investors have been increasingly putting their money into real estate, commodities, savings accounts, or U.S. Treasurys due to economic uncertainty.
Fed Hurts Businesses While Earning Banks Profit
Quantitative tightening—the monetary policy that central banks use to reduce the money supply—is accomplished by selling securities such as government bonds.
When market participants buy the securities, the amount of money circulating in the economy decreases, leading to higher interest rates, which can slow down economic activity.
The Federal Reserve since March 2022 has embraced quantitative tightening to control high inflation, with the federal funds rate increasing from near zero to a range of 5.0–5.25 percent.
This has caused a major blow to many businesses, which had long been used to low borrowing rates for over a decade.
Many companies are now dealing with higher borrowing costs and reduced consumer spending due to the spike in interest rates.
Banks are benefiting from the interest-rate spike as they make money from the spread between the rates at which they borrow and lend. The rise in the borrowing rate has caused an expansion to their net interest margins.
For example, JPMorgan’s net interest income rose to $21.9 billion in the second quarter, up 44 percent year over year, or 38 percent, excluding its May 1 acquisition of First Republic.
The earnings were predominantly driven by higher interest rates, but partially offset by lower deposit balances, said the report.
JP Morgan Doing Well After Buying First Republic
Meanwhile, net revenue from home lending earned the bank a total of $1 billion, an almost 40 percent increase from $720 million in the first quarter.
Home-lending earnings were up 1 percent from a year earlier, driven by lower net interest income from tighter loan spreads and lower servicing and production revenue.
The bank also attributed $2.4 billion of its net income in last quarter to the First Republic Bank purchase from the Federal Deposit Insurance Corp. after the regional bank was seized by the California Department of Financial Protection and Innovation.
JPMorgan Chase added that total net revenue was $42.4 billion, up 34 percent from a year earlier, or 21 percent, excluding First Republic, beating analysts’ expectations of $38.96 billion.
JPMorgan Chase stock was up around 1.25 percent on July 20, at 2 PM EST, for its tenth consecutive day in positive territory.
If the bank holds onto its gains today, its stock is poised for its longest winning streak since Feb. 18, 2014, when it rose for 10 trading days in a row, according to Dow Jones Market Data.
The stock still remains about 9 percent below its all-time high of $171.78 on Oct. 22, 2021.